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Syllabus D. Audit Evidence D4. The audit of specific items

D4b. Inventory - The Physical Count

Syllabus D4b)

Explain the audit objectives and the audit procedures in relation to: Inventory:
i) inventory counting procedures in relation to year-end and continuous inventory systems
ii) cut-off testing
iii) auditor’s attendance at inventory counting 
iv) direct confirmation of inventory held by third parties, 
v) valuation
vi) other evidence in relation to inventory.

Even sophisticated inventory systems should be backed up by a regular physical stock count

Why do a physical count?

  • Easy if small number of locations

  • Gives valuable evidence that the inventory actually exists

  • Helps check accuracy of inventory records

  • If no continuous inventory system it is the ONLY way of knowing the quantity

  • Discrepancies can help point to control deficiencies (that would otherwise have gone unnoticed)

  • Helps to see the condition of the stock

Why should the auditor attend the count?

Well she needs evidence about the existence and condition of inventory

But also...

  • Evaluate management’s instructions and procedures

  • Observe the performance of the procedures

  • Inspect the inventory

  • Perform tests counts

Audit work at the Count

  • Observe

    • Is the count being performed according to managements WRITTEN instructions

    • If any inventory condition is poor

    • If any inventory not owned by client is identified and labelled as such

    • How entries in and out of stock are dealt with during the count

    • If all items have been tagged as counted

  • Record

    • Any differences between their own test count and that of the client..

      Test from stock to client records (for completeness)

      Test from client records to stock (for existence)

    • The sequence numbers of the last tags and summary sheets used during the count. 

      This record will be used after the count to confirm that all inventory items are included in the client’s inventory list

    • Goods received (& despatch) notes issued before and after the count (for cut-off)

    • Details of slow-moving or obsolete inventory, or inventory in poor condition

Continuous (Perpetual) counting: several counts during the year

It helps avoid the potential disruption of an annual count at the year end of the reporting period

This is acceptable if....

  1. Client has a system for maintaining accurate and up-to-date inventory records

  2. Every item is counted at least once a year

  3. Counting is well organised and controlled

  4. Counts are documented and reviewed by management

  5. All differences are investigated